The execution quality of corporate bonds O’ Hara, Maureen; Wang, Yihui; (Alex) Zhou, Xing
Journal of financial economics,
11/2018, Letnik:
130, Številka:
2
Journal Article
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This paper investigates execution quality issues in corporate bond trading. Using an extensive sample of bond trades by insurance companies, we find that an insurance company entering a trade of ...similar size and on the same side for the same bond on the same day with the same dealer will receive a better price if the insurance company is a more active trader than if it is a less active trader. Trading with the dominant dealer or underwriter worsens these differentials, while greater transparency and smaller trading networks lessens these effects. Our results provide strong evidence that execution quality differences remain pervasive in corporate bond trading.
Markets are different now, transformed by technology and high frequency trading. In this paper, I investigate the implications of these changes for high frequency market microstructure (HFT). I ...describe the new high frequency world, with a particular focus on how HFT affects the strategies of traders and markets. I discuss some of the gaps that arise when thinking about microstructure research issues in the high frequency world. I suggest that, like everything else in the markets, research must also change to reflect the new realities of the high frequency world. I propose some topics for this new research agenda in high frequency market microstructure.
We investigate odd-lot trades in equity markets. Odd lots are increasingly used in algorithmic and high-frequency trading, but are not reported to the consolidated tape or in databases such as TAQ. ...In our sample, the median number of odd-lot trades is 24% but in some stocks odd lots are 60% or more of trading. Odd-lot trades contribute 35% of price discovery, consistent with informed traders using odd lots to avoid detection. Omitting odd-lot trades leads to inaccuracies in order imbalance measures and makes sentiment measures unreliable. Excluding odd lots from the consolidated tape raises important regulatory issues.
We investigate the informational role of volume and its applicability for technical analysis. We develop a new equilibrium model in which aggregate supply is fixed and traders receive signals with ...differing quality. We show that volume provides information on information quality that cannot be deduced from the price statistic. We show how volume, information precision, and price movements relate, and demonstrate how sequences of volume and prices can be informative. We also show that traders who use information contained in market statistics do better than traders who do not. Technical analysis thus arises as a natural component of the agents' learning process.
Using a laboratory market, we investigate how the ability to hide orders affects traders' strategies and market outcomes in a limit order book environment. We find that order strategies are greatly ...affected by allowing hidden liquidity, with traders substituting nondisplayed for displayed shares and changing the aggressiveness of their trading. As traders adapt their behavior to the different opacity regimes, however, most aggregate market outcomes (such as liquidity and informational efficiency) are not affected as much. We also find that opacity appears to increase the profits of informed traders but only when their private information is very valuable.
We investigate the effect of ambiguity about hedge fund investment strategies on asset prices and aggregate welfare. We model some traders (mutual funds) as facing ambiguity about the equilibrium ...trading strategies of other traders (hedge funds). This ambiguity limits the ability of mutual funds to infer information from prices and has negative effects on market outcomes. We use this analysis to investigate the implications of regulations that affect disclosure requirements of hedge funds or the cost of operating a hedge fund. Our analysis demonstrates how regulations affect asset prices and welfare through their influence on opaque trading.
This paper examines aftermarket trading of underwriters and unaffiliated market makers in the three-month period after an IPO. We find that the lead underwriter is always the dominant market maker; ...he takes substantial inventory positions in the aftermarket trading, and co-managers play a negligible role in aftermarket trading. The lead underwriter engages in stabilization activity for less successful IPOs, and uses the overallotment option to reduce his inventory risk. Compensation to the underwriter arises primarily from fees, but aftermarket trading does generate positive profits, which are positively related to the degree of underpricing.
Purchased order flow refers to the practice of dealers or trading locales paying brokers for retail order flow. It is alleged that such agreements are used to "cream skim" uninformed liquidity ...trades, leaving the information-based trades to established markets. We develop a test of this hypothesis, using a model of the stochastic process of trades. We then estimate the model for a sample of stocks known to be used in order purchase agreements that trade on the New York Stock Exchange (NYSE) and the Cincinnati Stock Exchange. Our main empirical result is that there is a significant difference in the information content of orders executed in New York and Cincinnati, and that this difference is consistant with cream-skimming.
This paper delineates the link between the existence of information, the timing of trades, and the stochastic process of prices. We show that time affects prices, with the time between trades ...affecting spreads. Because the absence of trades is correlated with volume, our model predicts a testable relation between spreads and normal and unexpected volume, and demonstrates how volume affects the speed of price adjustment. Our model also demonstrates how the transaction price series will be a biased representation of the true price process, with the variance being both overstated and heteroskedastic.
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